Allowable expenses on a tax return are the costs the IRS lets you subtract from your income so you pay tax only on what you actually kept. They fall into three groups: business expenses that reduce your income whether or not you itemize, above-the-line adjustments that work the same way, and itemized personal deductions that only help if they beat the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married filing jointly, and $24,150 for head of household.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Your personal itemized expenses only matter if they exceed those numbers. Business expenses are different — they come off your income no matter which path you take.
The Ordinary and Necessary Test for Business Expenses
Every business deduction starts with the same two-word test: ordinary and necessary. An ordinary expense is one that’s common and accepted in your line of work. A necessary expense is one that’s helpful and appropriate for running your business. It doesn’t have to be essential.2Internal Revenue Service. Ordinary and Necessary
The point of the test is to separate legitimate business costs from personal spending routed through a business. A landscaper buying a mower passes easily. That same landscaper deducting a family vacation does not, even if they stopped to look at a client’s yard on the way. When the IRS challenges a deduction, you have to show the expense was tied to earning income.
Business Expenses You Can Deduct
Home Office
If you use part of your home exclusively and regularly as your main place of business, you can deduct a share of your housing costs. The simplified method gives you $5 per square foot of dedicated workspace, up to 300 square feet — a maximum of $1,500.3Internal Revenue Service. Simplified Option for Home Office Deduction The regular method lets you calculate actual costs like mortgage interest, insurance, utilities, and repairs based on the percentage of your home used for business. It requires more paperwork, but the deduction is usually larger.
Vehicle Expenses
For 2026, the standard mileage rate for business driving is 72.5 cents per mile.4Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents You can use that rate or track actual costs for gas, insurance, repairs, and depreciation. Either way, you need a mileage log recording the date, destination, business purpose, and miles for each trip. Starting the log on January 1 and keeping it current is much easier than reconstructing a year of driving in April.
Equipment and Section 179
Small purchases like office supplies and software are deductible in the year you buy them. Larger equipment such as computers, machinery, and vehicles normally must be depreciated over several years, but Section 179 lets you write off the full cost in the year the equipment goes into service.5Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets For 2026, you can expense up to $2,560,000 in qualifying equipment, with the benefit beginning to phase out once purchases exceed $4,090,000. Most small businesses never approach those ceilings.
Business Meals
Meals with clients, prospects, or business associates remain 50% deductible in 2026 as long as the meal isn’t lavish and has a clear business purpose. The same 50% limit applies to meals while traveling on business and food served during internal business meetings. One change catches employers off guard: starting in 2026, meals provided on the employer’s premises for the employer’s convenience, including breakroom coffee and snacks, are no longer deductible at all.
Travel and Insurance
Business travel is deductible when you’re away from your tax home overnight or long enough to require rest. That covers airfare, hotels, rental cars, and similar costs. The trip must be primarily for business; if you tack on vacation days, only the business-related portion counts. Premiums for professional liability, property coverage, and workers’ compensation also qualify as ordinary business expenses.
Adjustments That Reduce Income Before You Itemize
Some deductions reduce your adjusted gross income directly, so you get them whether you itemize or take the standard deduction. They show up on Schedule 1 of Form 1040 and are often called above-the-line deductions because they come before the line where AGI is calculated. A lower AGI can also help you qualify for other tax breaks that phase out at higher income levels.
Half of Self-Employment Tax
Self-employed individuals pay both halves of Social Security and Medicare taxes, a combined 15.3% on net self-employment earnings. The IRS lets you deduct the employer-equivalent half (7.65%) when calculating your AGI. The deduction reduces income tax only, not the self-employment tax itself.6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) On $100,000 of self-employment income, this adjustment is worth roughly $7,650 off the top.
Self-Employed Health Insurance
If you’re self-employed and pay for your own health coverage, you can deduct premiums for yourself, your spouse, and your dependents as an adjustment to income rather than as an itemized deduction. Claim it on Schedule 1 using Form 7206.7Internal Revenue Service. About Form 7206, Self-Employed Health Insurance Deduction The deduction can’t exceed your net self-employment income from the business the plan is established under.
Student Loan Interest
You can deduct up to $2,500 in student loan interest paid during the year even if you don’t itemize.8Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction The deduction phases out at higher incomes, and you lose it entirely if you file as married filing separately. Your lender should send a Form 1098-E showing the interest paid.
The 20% Qualified Business Income Deduction
Owners of sole proprietorships, partnerships, S corporations, and certain trusts can deduct up to 20% of their qualified business income under Section 199A. For 2026, the deduction begins to phase out at $201,750 in taxable income for single filers and $403,500 for married couples filing jointly. Above those thresholds, restrictions kick in based on the type of business, wages paid, and property held.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Service-based businesses like law firms, medical practices, and consulting operations face stricter limits. Once a single filer’s income exceeds $276,750, or $553,500 for joint filers, service-business owners lose the deduction entirely. Below the phase-out range, most pass-through owners multiply their qualified business income by 20% and claim the result on Form 8995.
Itemized Personal Deductions
You choose between the standard deduction and itemizing, whichever is larger. With the 2026 standard deduction as high as it is, most filers don’t benefit from itemizing unless they have a large mortgage, significant charitable giving, or high state and local taxes. If your itemized expenses do exceed the standard deduction, you’ll report them on Schedule A.
Medical and Dental
You can deduct medical and dental costs that exceed 7.5% of your AGI, but only the portion above that floor counts.9Internal Revenue Service. Publication 502 – Medical and Dental Expenses If your AGI is $80,000, your first $6,000 in medical bills gets you nothing. Qualifying costs include doctor and hospital bills, prescriptions, dental work, and certain preventative care. Amounts reimbursed by insurance don’t count.
State and Local Taxes
The SALT deduction covers property taxes combined with either state income taxes or state sales taxes; you pick whichever is higher. For 2026, the cap is $40,000 for most filers and $20,000 if married filing separately, a significant increase from the $10,000 cap that applied from 2018 through 2025.10Internal Revenue Service. Topic No. 503, Deductible Taxes The higher cap phases down for taxpayers with modified AGI above $500,000 but can’t drop below $10,000. For homeowners in high-tax states, this change alone may make itemizing worthwhile again.
Home Mortgage Interest
You can deduct interest on the first $750,000 of mortgage debt used to buy, build, or substantially improve your primary residence or a second home ($375,000 if married filing separately). For mortgages taken out on or before December 15, 2017, the older $1 million cap ($500,000 if married filing separately) still applies.11Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction Your lender sends a Form 1098 each January showing how much interest you paid. Home equity loan interest is only deductible if you used the borrowed funds to improve the home securing the loan.
Charitable Contributions
Donations to qualified charities are deductible if you itemize. Cash contributions to most public charities are limited to 60% of your AGI; donations of appreciated property follow lower percentage limits depending on the type of organization.12Internal Revenue Service. Charitable Contribution Deductions Any donation of $250 or more requires a written acknowledgment from the receiving organization showing the date, amount, and whether you received anything in return.13Internal Revenue Service. Publication 526 – Charitable Contributions Keep those letters. The IRS can disallow the entire deduction without them.
Records You Need to Keep
No deduction survives an audit without documentation. You need receipts, bank statements, or digital payment records showing the date, amount, and business purpose of every expense. For vehicle deductions specifically, a contemporaneous mileage log carries far more weight than notes reconstructed later.
How long you keep records depends on your situation:14Internal Revenue Service. Topic No. 305, Recordkeeping
- Three years is the standard retention period, measured from the date you filed. Returns filed before the due date count as filed on the due date.
- Six years applies if you failed to report income exceeding 25% of the gross income shown on your return, or if it involved foreign financial assets over $5,000.
- Four years is the minimum for employment tax records, measured from when the tax was due or paid, whichever is later.
- Indefinitely applies if you filed a fraudulent return or didn’t file at all. Property records should also be kept until at least three years after you sell the property, since they’re needed to calculate gain or loss.
Where Each Deduction Goes on Your Return
Business income and expenses go on Schedule C, which flows into your Form 1040. Itemized personal deductions go on Schedule A. Above-the-line adjustments like the self-employment tax deduction and student loan interest go on Schedule 1. All of these ultimately feed into Form 1040, which calculates your final tax liability.15Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return For the 2025 tax year, individual returns are due April 15, 2026.16Internal Revenue Service. When to File
What It Costs to Get Deductions Wrong
If the IRS decides you were negligent or substantially understated your income tax, you face a 20% accuracy-related penalty on the underpayment. A substantial understatement means the amount underreported exceeds the greater of 10% of the correct tax or $5,000.17Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Taxpayers claiming the qualified business income deduction face a tighter threshold: the understatement only needs to exceed 5% of the correct tax. Late filing without an extension adds a failure-to-file penalty of 5% of unpaid tax per month, capped at 25%, and a separate failure-to-pay penalty of 0.5% per month, also capped at 25%.18Internal Revenue Service. Failure to File Penalty Thorough records protect you on both sides: they maximize the deductions you’re entitled to and prove you weren’t making things up if the IRS asks.